The Committee on Securities Regulation of the Business Law Section of the New York State Bar Association appreciates the opportunity to comment on Release Nos. 33-7380, 34-38164 and IC-22464, dated January 14, 1997. The Release proposes rules that would require companies to use plain English principles in writing the front and back cover pages, the summary and the risk factors sections of prospectuses, revise current requirements for highly technical information in the front of prospectuses and revise the rule on the preparation of prospectuses to provide companies with more specific guidance on the clarity required in the entire document.

The Committee on Securities Regulation is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among our members and the views expressed in this letter are generally consistent with those of the majority of our members who reviewed the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which our members are associated, the New York State Bar Association or its Business Law Section.

We welcome your initiative to facilitate and encourage the use of plain English and graphic design features in disclosure documents to make them easier to read and to understand, although we feel strongly that changes in writing style would be more appropriately accomplished by a staff interpretation than by the proposed amendment to Rule 421. The proposal to relocate some technical disclosure and to permit standardized legends to be rewritten in plain English and printed in formats other than block capitals should do much to reduce the clutter of

prospectus cover pages. The proposal to make the summary and risk

sections shorter and clearer should also be beneficial, but we have some reservations, discussed later in this letter, about specific conditions that you propose to require for disclosure in those sections.

Plain English Principles

The proposed amendment to Rule 421 requires that plain English writing principles be used in the front and back cover pages and the summary and risk factor sections of a prospectus. Rule 421(d)(1) would provide that the disclosure in those sections "should substantially comply" with each of the following:

(i) Active voice;

(ii) Short sentences;

(iii) Definite, concrete, everyday words;

(iv) Tabular presentation or "bullet" list for complex material,

whenever possible;

(v) No legal jargon, or highly technical business terms; and

(vi) No multiple negatives.

These are excellent general principles for any writer, and you are right to encourage their use. However, the Release proposes to compel compliance with the plain English principles by amending Rule 461(b)(1) to permit you to refuse to accelerate a registration statement where the plain English prospectus requirements of Rule 421(d) have not been met. We believe that Rule 421(d), as proposed, would impose additional liability risks on issuers, and replace one form of stylistic inflexibility with another.

Active Voice. The draft "Plain English Handbook" prepared by the Commission's Office of Investor Education and Assistance sensibly advises, "Don't ban the passive voice; use it sparingly," and adds, "the passive may make sense when it's not important for the reader to know the person or thing performing the action." In addition, there may be circumstances when the most important word in a sentence is the object of the action, and the passive voice can be used effectively to place that word at the beginning of the sentence. Rule 421(d) should permit more flexibility in the use of the passive voice than it does.

No Multiple Negatives. Like the rule on passive voice, the prohibition on multiple negatives places too strict a constraint on writing style. This is particularly true because the examples of multiple negatives provided in the Release take a very broad view of that term. The Release cites the following sentence as an example of writing "before" the use of plain English principles: "No clause can become valid unless approved by both parties." The sentence structure is not a true double negative at all, but a widely accepted way of making an "if and only if" statement. To some readers, the sentence appears more natural than its suggested "after" version: "A clause becomes valid only if both parties approve it." In the end, the difference may depend on whether the writer intends for the condition to seem restrictive or permissive. Where the multiple negative does not impede comprehension, the choice of whether to use it should remain the writer's prerogative.

No Legal Jargon, or Highly Technical Business Terms. This part of the rule presents the greatest cost and risk of liability to issuers. Prospectus drafters will be required to find different words not only for legal terms or technical business terms commonly used in prospectuses of the type being prepared, but also for terms used in legal documents being described. The meanings of some legal terms must be found in numerous court decisions, regulations, no-action letters and other sources. Two examples, "securities" and "underwriter," demonstrate that terms that may seem ordinary to the average reader frequently have very involved technical meanings in a prospectus. There is no bright line between those terms that are technical and those that are not. This makes the requirements to avoid such terms exceedingly difficult to follow. Terms with multiple overlapping meanings cannot be paraphrased without the risk of missing part of the meaning, leading to the possibility of liability for material misstatements or omissions.

The difficulty of peeling away the layers of meaning in a commonly-used phrase is illustrated by another "before" and "after" example provided in the Release. The Release suggests that a sentence in a standard prospectus legend, "Information contained herein is subject to completion or amendment," could be translated as: "The information in this prospectus is not complete and may be amended." However, the key concept of the phrase "subject to completion" is that the prospectus is not legally binding and may not be relied upon until it is completed. The statement that the prospectus is not complete might be understood by some readers to mean simply that the prospectus does not contain all information about the offering (which, of course, is true). A better translation might be: "The information in this prospectus is preliminary and will not be complete until the prospectus is circulated in final form."

We are aware that proposed Rule 421(d) would apply only to the cover pages and summary and risk sections of the prospectus. But we assume that in time you may apply the plain English principles of Rule 421(d) to all of the prospectus, making the cost and risk of liability for compliance more significant. We feel strongly that what drafters need is guidance and freedom to innovate, rather than a new rule imposing stylistic conditions on disclosure. You would do better to create a new environment for more readable disclosure by way of interpretive releases and staff comments. If you proceed by way of rulemaking, however, we suggest that you give prospectus drafters greater flexibility by adding a clause substantially as follows after the words "plain English writing principles" and before the colon: "unless the disclosure is otherwise clear and easily understood in the context in which it occurs."

We also suggest that you amend proposed clause (v) of Rule 421(d) to read: "no legal jargon, or highly technical business terms, unless such terms are likely to be readily understood by the expected audience for the disclosure."

Summary Section

We agree that issuers should be encouraged to provide summary sections that truly summarize, rather than repeat, disclosure found elsewhere in the prospectus. The proposed amendments to Item 503(a) of Form S-B and Item 503(a) of Form S-K, which provide that disclosure in the summary should be brief and should not contain all of the detailed information in the prospectus, appear to us to be sensible and adequate. Those items should not be further amended to impose arbitrary limits on the length of summary sections. We feel that the goal of fostering more concise summary sections would be better accomplished through the staff review process than by setting a mechanical limit, based on number of words or pages, that will be too short for some offerings and too long for others.

You appear confident that the length and complexity of the summary can be reduced with plain English without increased risk of liability for non-disclosure. Furthermore, we assume that you are proposing plain English for the summary but not the rest of the text to encourage the use of plain English through confidence that the rest of the text can provide all necessary information. We believe that you would substantially aid this effort by providing a safe harbor for the new form of summary dependent upon there being no material misstatements or omissions in the longer, more traditional disclosure on the same subjects in the rest of the text. Conversely, we believe that your reluctance to provide such a safe harbor will send a message that nothing can be left out of the summary in order to make it shorter and clearer. The doctrine of "buried facts" articulated in Gould v. American Hawaiian Steamship Co., 331 F.Supp. 981 (D.Del. 1971) and Kohn v. American Metal Climax, Inc., 322 F.Supp. 1331 (E.D.Pa. 1970), by which Rule 10b-5 liability could be predicated on placement of disclosure in the offering document, still affects thinking about what must be included in the summary. If non-disclosure in the summary may be grounds for liability, issuers will find it difficult to omit material from the summary.

Risk Factors

We support the elimination of generic, non-specific risk factors and the focus on critical factors that an investor should consider, proposed in Item 503(b) of Form S-B and Item 503(b) of Form S-K. We note, however, that many so-called "boilerplate" risk factors have become standard just because they are so clearly applicable. Banning their use would be a disservice to unsophisticated readers to whom boilerplate risk factors might not be obvious. We strongly disagree with the amendment to Item 503(b) in Forms S-B and S-K that would require risk factors to be discussed in the order of their importance, and we disagree with the proposal, noted in the Release, that there be a limit on the number of risk factors.

We have two objections to the requirement that risk factors be listed in order of importance. The first is that order of importance is impossible to determine. A risk factor may be important because it is highly likely to occur, or because it will have a large impact on the company if it does occur; the proposal does not state whether probability or impact is more important. Our second objection is that, even if a calculus of probability and impact could be devised, the very process of ranking risk factors makes the issuer vulnerable to claims that it attempted to downplay some risks by listing them last. Matters included under risk factors are included for the very reason that the likelihood of their occurrence or the magnitude of their effect or both are uncertain. It is, therefore, impossible to correctly order them. Giving the reader of these documents the impression that they have been listed in the order of importance can only mislead the reader. The consequence of that will be additional liability to issuers. With the proposed rule, an investor who understood the first three risk factors and concluded that they should not deter investment, might reasonably feel that the fourth risk factor, describing events that ultimately came to pass, had been misleadingly ordered, even if statistically less likely to occur.

With risk factors, as with summaries, we believe that the best way to encourage the use of a few significant risk factors, rather than a combination of significant and generic risk factors, is through the staff review process. You should not impose a limit on the number of risk factors that may be included in the risk factors section. Some offerings will require only a few risk factors, and others will require many more to adequately cover the real risks of the offering. No issuer should ever be put in the position of choosing among significant material risks in order to satisfy a numerical limitation. In addition, any limitation on the number of risk factors permitted may conflict with Section 27A of the Securities Act of 1933, which provides a safe harbor for a forward-looking statement if, among other things, it is accompanied by "meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement."

We would like to express our appreciation for the opportunity to express these comments. We are available to discuss them further if you so desire.